PAUL SINGER text book activism

Paul Singer gained fame by pushing Argentina into a default. His activist transactions are worth looking at too. His Romanian venture is a text book case of activist investing that generates return for all shareholders.

Elliot Associates is the largest investor in a Romanian USD 4.4 bln. energy fund Fondul Proprietatea. The fund was created to compensate Romanians whose assets were seized under communism. The fund holds minority stakes in Romanian energy companies, some of which are unlisted. The fund is managed by Franklin Templeton. Elliot Associates is the largest shareholder with 15.2% stake valued over 600 mil. USD. It is Elliot´s third largest equity position.

Since its listing on Bucharest stock exchange in January 2011 the fund has been trading at a discount to its Net Assets Value (NAV). The discount has been narrowing, just in the last 12 months by 37%. In addition the fund pays annual dividends of around 7-8%.

Paul Singer has a team of lawyers in Romanian that pushes Templeton into concrete steps to reduce the NAV discount. The fund has just completed 3rd round of buyback in which it purchased 10% of its outstanding shares. The unlisted portfolio decreased by half during the last two years.

This week the shareholders led by Elliot agreed to extend the management contract for Templeton by additional two years. The new contract includes criteria that has to be met for Templeton to continue managing the fund. The most important one is to decrease the NAV discount to 15% (from current 27%) in two thirds of trading sessions between October 1, 2014 and June 30, 2015.

Templeton is waiting for Romanian financial regulator to approve the concrete steps to achieve the mission, namely the secondary London listing (scheduled for October) to broaden the investor universe and 4th round of buyback in which the fund will buy 7.3% of its shares.

Templeton expects further gains could come from IPO of power producers Hydroelectrica, Oltenia, port of Constanca and Bucharest airport all scheduled for 2015. Fondul is also negotiating to sell stakes in two electricity distribution companies to local power producer and distributor Electrica.

Local media speculate that Fondul has retained Goldman Sachs and Erste bank to find buyers for the OMV Petrom stake, which represents 35% of the fund´s NAV.

If the above transactions materialize, the fund cash balance should increase from 8% by 20%-40%. This would allow Templeton to finance further buyback or possibly convert the closed end fund into open ended, which would immediately allow the investors to realize the NAV discount.

All the above steps should contribute to narrowing the discount. If this happens investors will make additional 40%. Not bad, given the fact that Paul Singer is doing all the work.

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